Mary Holm: Corporate boxes can be deductible

The rules around the deductibility of entertainment expenditure are well past their use-by date, says PwC partner Scott Kerse. Photo / Getty Images

Are those who buy corporate boxes at the Rugby World Cup (or similar sports events) able to write off any expenses involved as a tax-deductible business cost?

If they can, this means in effect that ordinary wage and salary earners pay for these indulgences. And the tax system is sicker than I suspected.

Even if corporate box expenses were fully deductible, that doesn't quite mean that wage earners pay for them.

At the current 28 per cent company tax rate, if a company spent and deducted $1000, that would reduce its tax by $280. It would still pay the remaining $720.

Nonetheless, if the expense were not deductible, the company would pay $280 more in tax. Each wage earner could pay a tiny bit less tax.

So how deductible are these expenses?

"To be tax-deductible at all, the expenses have to have a valid business purpose," says PwC partner Scott Kerse. "Once you pass that test the answer depends on whether the box is owned or rented, what type of expenditure you are talking about and whether employees [who would be subject to the fringe benefit tax rules] are involved."

He gives some examples: "The cost of hiring a corporate box and the entertaining [food and drink] that usually accompanies such a venue would generally be only 50 per cent deductible to the hirer. The cost of shouting customers tickets to the rugby [not in a corporate box] would generally be fully deductible. The cost of buying customers a beer beforehand in a pub would only be 50 per cent deductible."

What about employee perks? "The cost of requiring employees to attend such functions is 50 per cent deductible. The cost of buying employees tickets to the rugby and letting them decide whether to go is subject to fringe benefit tax."

I've always thought the 50 per cent bit reflects the fact that if you enjoy half the food, drink and entertainment yourself, that half shouldn't be deductible. But if you are shouting others - presumably because you want them to start or continue to do business with you - that is a business expense.

However, Kerse's examples don't all fit neatly into that explanation. He comments: "Confused? You should be. The rules around the deductibility of this type of expenditure are complicated, well past their use-by date and not well-understood."

Regardless of the detail, our correspondent will probably be unhappy that any of the expenses are deductible.

At the risk of making you cross, though, it's fair to say that running a business can be risky and really hard work. And businesses hire people and contribute to economic growth. I'm not too bothered if there are a few rewards.

Retirement savings

I think you should point out to the person in the column two weeks ago that if you said to someone that retired today, "Here is $450,000", they would be very happy. Let's assume they retire at 65 and are going to live until 85. That's $22,500 a year to spend on top of their pension.

I am in KiwiSaver and haven't calculated how much it will return to me in retirement. The one thing I do know is that if I save nothing I will get nothing extra when I retire.

If you want more in retirement, save more now. Don't blame KiwiSaver. It can only return based on what is put in.

That reader was complaining that an ad said people in some circumstances would end up with $1.8 million in KiwiSaver after 45 years, but that number wasn't adjusted for inflation. If it were, it would be about $450,000.

You're right, of course, that $450,000 is not to be sneezed at - even though $1.8 million would buy a couple more luxuries.

And I also like your simple calculation, dividing the $450,000 by 20 years.

Some experts would object on a couple of grounds:

* What if you live beyond 85? The most recent life expectancies say the average 65-year-old man will live to 82, and woman to 85. But updated averages would be older. Also, many people live well past the average.

In response to that: People over 85 often say they can manage on just NZ Super. Their health care costs may be high, but the government helps out. And 85-pluses don't tend to travel or go out as much as 85-minuses - although it's great to hear about the exceptions.

* Your calculation doesn't allow for returns on the money over the 20 years.

In response: You also don't adjust for inflation. Given that retired people tend to prefer lower-risk investments, their returns may not be much above inflation. While the nest egg grows, so do prices, so you stay in much the same place in terms of buying power.

That's being conservative. With any luck you will do a bit better than inflation. But the extra covers you if you live beyond 85 and are still climbing mountains and boogieing at nightclubs till dawn.

As for not calculating your likely KiwiSaver retirement total, I have mixed feelings. It's good to have a rough idea where you are heading. But if you are under, say, 40ish, it all gets pretty vague. Your retirement total will depend on returns and inflation over the years, and how your income and involvement in the workforce changes - all unknowns. I tend to agree with you - just get on and save what you can.

Pointless analysis

The average male lives only to 73 years old. So what are the numbers? If he worked for 55 years, how much tax did he pay including GST?

None of you reporters ever talks about the situation as if it's an equation. The Government as part of the nanny state has taken money. How much and what sort of business deal has it been for a taxpayer?

Ask an accountant to look at it and come back to us with the numbers? I am tired of what I think is shallow writing.

I'm afraid you won't get much "deep" writing here, for several reasons.

First, some quibbles over numbers. You seem to be looking from the perspective of a retiree. And - as stated above - if the average male reaches 65, he is expected to live to 82-plus, not 73. Also, most people don't work for 55 years. Forty-five to 50 is more typical.

Receiving 17 years of NZ Super after 50 years of work sounds a bit better than receiving eight years of Super after 55 years of work.

Second, I doubt if an accountant would do your requested research. An economist is a better bet, and some economists have done work along these lines, but it's tricky. For example, assumptions about what is typical can make a huge difference to the results. What's more, "average" disguises wide variations among people over their lifetimes.

Most importantly, though, what's the point? There is no equation or deal.

When we pay tax, that money is currently spent as follows: social welfare (including NZ Super) 31 per cent, health 20 per cent, education 17 per cent, everything else 32 per cent.

Looking at individuals, generally the government spends more on children, beneficiaries, at-home caregivers and retirees than they contribute in tax. For most others, it's the reverse.

But nobody is a child or retiree all their lives. For the average person, it must even out over their lifetime.

That means, of course, that half are below average, putting in more than they get back. And reading between the lines, I suspect that includes you - and probably also me. Lucky us! That suggests we've been healthy enough and in the right circumstances to have worked for many years.

Anyway, it's not that straightforward. Let's say you have no children. That doesn't mean you gain nothing from government spending on education, apart from the amount spent on your own schooling. Whether you are an employer, a co-worker or just somebody out there in the world - banking, using health services, shopping and so on - I bet you wouldn't like to deal with uneducated people.

For another perspective, I asked Michael Littlewood, co-director of the Retirement Policy and Research Centre at the University of Auckland.

"Let's look at New Zealand Superannuation because I guess that's at the heart of his question," he says. "In fact, the annual amount of NZ Super this year is the total amount that today's taxpayers as a whole, including companies, are willing to allocate this year to the NZ Super 'bucket' divided by the number of old people who, this year, are entitled to receive that pension.

"That proposition was true in 1956 (when your reader's mythical male employee started work), is true today and will still be true in 2051, long after that employee has died.

"The keys here are what taxpayers of the day are prepared to spend and how many are entitled. It has nothing to do with lifetime taxes, benefits or anything else that might have happened to the employee during his entire lifetime."

Littlewood makes another important point. "By the way, I presume your reader's 'average male' employee is married and has children who were looked after by the mother at home. So how might we put a value on her nurture before we decide whether she gets 'fair' value from her NZ Super as part of the 'business deal'?

"In fact, why does she get any NZ Super at all, given that she might not have paid any tax, or not as much as her taxpaying husband?"

He concludes: "It's a really pointless analysis that gets us nowhere."

Hear, hear.

Balancing act

I am a 61-year-old male who has been in KiwiSaver from the beginning, and I work part-time.

I put in 4 per cent of my wage and my employer 2 per cent at present. I have another 3.5 years before retirement and would like to know what is the best type of fund I should have my money going into to attain the best outcome.

It depends on when you plan to spend the money. If it's mostly within the next 10 years, I suggest you invest in a conservative fund, holding mainly bonds and bank deposits.

But if you have other savings to spend early in your retirement and you don't think you'll spend the KiwiSaver money for at least 10 or 12 years, go for a growth fund, holding mainly shares.

Over the long term, growth funds usually grow more. But their shorter-term volatility makes them bad bets for spending in the near future. There's too much risk markets will be down when you want to spend.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.